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Which Trend Do You Trade?

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Trading with the trend may not be the sexiest or quickest way to make a buck, but over the long term, it's the best way to be a successful trader or investor.

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Editor's note: The following analysis was shared last night on Jim Cramer's Mad Money show. You can see the segment from CNBC here.

In today's stock market, there are too many trading/investing cliches thrown around. There are only a few you should pay attention to, in my opinion. The most important one for me is, the trend is your friend.

Human behavior, and market cycles, repeat themselves. We all exhibit greed, fear, and complacency at different points of market cycles. While there are different styles of technical trading our there today, I have found in my own trading that I am most profitable when a trend is in place.

Trends build your confidence, giving you the belief to buy dips and stick with positions over longer time-frames. They also allow you the opportunity to identify relative strength. Using a tier system for entries and exits you can navigate trends of different slopes, and trends within trends. Trading with the trend may not be the sexiest or quickest way to make a buck, but over the long term I believe it is the best way to be a successful trader or investor.

As a trader or investor, the first -- and perhaps most important -- step is identifying your risk tolerance, investment objectives, and time frame. Are you a long-term investor looking to hold stocks over a long horizon? Are you a trend follower who likes to follow intermediate-term trends? Or are you a risk-averse momentum trader who sleeps better with no risk exposure overnight?

No matter what your time frame is, I believe you need to know basic principles of technical analysis as it pertains to following trends. No trader or investor should enter the market without a risk-management system, and understanding trends is the way to build that system. Let me explain further using four different charts.

Multiple Trends Built Since March 2009

Three trends have developed since the market bottomed in 2009. Everyone loves to complain about the market. If you are simply a technical trend follower, there is absolutely nothing to complain about at all.


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The above monthly chart shows the Bullish Outside Reversal from March 2009 that lead to the new macro uptrend. For this trend to continue we need to, at some point this year, take out the 1370 level.


Click to enlarge

The second chart, above, shows a more recent trend that we have seen develop in the past few months. The candlestick that ignited the move is the same type of candlestick that ignited the market's macro uptrend in March 2009. Technical analysis can be applied on any time frame, and this is an example. Same pattern, different scope.

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No positions in stocks mentioned.

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